Towers Perrin Report Subj Tort Cost Trends 2007
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2007 Update on U.S. Tort Cost Trends 2007 Update on U.S. Tort Cost Trends | 1 TABLE OF CONTENTS INTRODUCTION..........................................................................................2 EXECUTIVE SUMMARY......................................................................................................3 Key Findings................................................................................................................3 Future Implications........................................................................................................4 FINDINGS..................................................................................................5 2006 Tort Costs................................................................................................5 Costs Relative to GDP......................................................................................5 Costs Relative to Population..........................................................................5 Split to Personal Versus Commercial....................................................................5 METHODOLOGY AND APPROACH................................................................7 Components of Tort Costs......................................................................................7 Categories of Tort Costs................................................................................8 Excluded Costs..........................................................................................9 LOOKING AHEAD....................................................................................11 APPENDICES..................................................................................................12 © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 2 INTRODUCTION TABLE OF CONTENTS The 2007 Update on U.S. Tort Cost Trends represents the 11th study of U.S. tort costs published by the Tillinghast Insurance Consulting practice of Towers Perrin. The first study was completed in 1985. The most recent study, incorporating results through 2005, was published in December 2006. This update provides results from 1950 through 2006, with projections through 2009. This study has not been funded or subject to pre-release approval by any outside organization and was conducted entirely by Tillinghast. This study takes no position on whether tort costs are too high or too low. Its purpose is to attempt to quantify the costs, not to support any particular point of view regarding those costs. Any connotation that an increase in tort costs is undesirable is unintended. Further, this study examines only one side of the U.S. tort system: the costs. No attempt has been made to measure or quantify the benefits of the tort system. This study makes no conclusion that the costs of the U.S. tort system outweigh the benefits, or vice versa. Tort costs as tabulated in this study reflect all of the various outcomes from an alleged tort. The tort claim dispute resolution process may be thought of as a continuum. An event causes one party to believe it has suffered damages as a result of the negligence of another party. From that point, the parties attempt to come to a resolution. However, the two sides often will not easily agree on either the degree of negligence or the amount of damages. The dispute may be resolved in a number of ways: Ⅲ before a lawsuit is filed, by mutual agreement or through arbitration Ⅲ after a lawsuit is filed, but prior to a trial Ⅲ as a result of a verdict in a trial (as well as potential subsequent appeal). Parties may elect to settle their dispute at any point along this continuum to avoid additional expense or the potential exposure they might face by taking the process to the next stage. For more information on Tillinghast’s tort cost studies, please contact Russ Sutter at (314) 719-5834 or russ.sutter@towersperrin.com. © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 3 EXECUTIVE SUMMARY KEY FINDINGS U.S. tort costs decreased by 5.5% in 2006, as shown in Table 1. This represents the first decrease in tort costs since 1997 and the largest percentage decrease in the 56-year period contained in this study. A decrease in reported claims in 2006, with no significant increases in the cost of claims, helped fuel the overall decline in tort costs. TABLE 1: GROWTH OF U.S. TORT COSTS AND GDP Years Average Annual Increase in Tort Costs Average Annual Increase in GDP 1951-1960 11.6% 1961-1970 9.8 7.0 1971-1980 11.9 10.4 1981-1990 11.8 7.6 1991-2000 6.0% 3.2 5.4 2001 14.7 3.2 The U.S. tort system cost $247 billion in 2006, which translates to $825 per person, or $57 per person less than in 2005. 2002 13.4 3.4 2003 5.5 4.7 2004 6.0 6.6 2005 0.4 6.4 Overall economic growth in 2006 was 6.1%. As such, the ratio of tort costs to gross domestic product (GDP) shrank in 2006. Since 1950, growth in tort costs has exceeded growth in GDP by an average of slightly more than two percentage points. 2006 -5.5 6.1 56 years (1950-2006) 9.2% 7.0% © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 4 TABLE OF CONTENTS FUTURE IMPLICATIONS We are forecasting growth in U.S. tort costs of 2.5% in 2007, with a slightly higher growth (4.5%) in 2008 and 2009. There are several issues that will determine the future trends in U.S. tort costs, including: Ⅲ Auto accidents. The frequency of auto accidents has declined over the last several years. However, there is some evidence that the period of declining frequency may be nearing an end, putting upward pressure on tort costs. Ⅲ Subprime mortgages. The deterioration in the subprime mortgage market in 2007 has caused several financial institutions to post losses. Lawsuit activity, both from investors in these financial institutions and homeowners who accepted the mortgages, may follow as a consequence. Ⅲ Backdating of options. Several U.S. corporations are alleged to have backdated options grants. This issue raises the possibility of a resurgence of directors and officers liability claims. Ⅲ Global warming. The increased attention paid to this issue, both the causes and effects, may lead to increased litigation toward organizations that may be accused of contributing to this problem. Ⅲ New theories of liability. The burden of proof may be changing in some litigation. For instance, actions have recently been brought against lead paint manufacturers despite no tie between the manufacturers and the paint that is alleged to have caused the damages. Ⅲ Medical malpractice. Several states enacted medical malpractice reforms earlier in this decade. Possibly as a result, trends in medical malpractice have moderated, significantly in some jurisdictions. Ⅲ Obesity. While not contributing to significant current litigation, the increased awareness of the link between obesity and subsequent serious health problems, such as diabetes, could lead to a material amount of litigation activity in the future. Ⅲ Employment liability. Recent issues related to age discrimination as well as overtime rules have contributed to significant employment practice litigation. Ⅲ Shareholder suits versus third parties. The U.S. Supreme Court recently heard the Stoneridge case, testing the concept of whether shareholders can bring an action against third parties who are charged with aiding a corporation that has defrauded its investors. Ⅲ Asbestos. Less of an issue in 2006 than earlier this decade, asbestos litigation continues. The ultimate outcomes of that litigation will contribute to future trends in tort costs. © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 5 FINDINGS 2006 TORT COSTS Tillinghast estimates that total insured and self-insured tort costs in the U.S. were $247 billion in 2006. This is a decrease of $13.4 billion, or 5.5%, from the estimated $261.4 billion of tort costs in 2005. The decrease in 2006 costs is the first decrease in costs since 1997. COSTS RELATIVE TO GDP The ratio of U.S. tort costs to (GDP) has increased significantly since 1950. However, as shown in Table 2, the ratio of tort costs to GDP* decreased substantially since 2004. The year with the highest ratio of tort costs to GDP is 1987, at 2.33%. As shown in Appendix 1A, the ratio generally declined from 1987 to 1999, when it reached 1.81%. COSTS RELATIVE TO POPULATION Growth in U.S. tort costs since 1950 has far exceeded U.S. population growth, as indicated in Table 3. Even after adjusting for inflation, tort costs per capita have risen by a factor of more than eight between 1950 and 2006. However, inflation-adjusted tort costs per capita were lower in 2006 than in the prior three years. SPLIT TO PERSONAL VERSUS COMMERCIAL Table 4 (page 6) shows our estimate of the costs of personal and commercial U.S. torts since 1990. “Commercial” reflects torts alleged against businesses, including all medical malpractice. “Personal” tort costs include torts TABLE 2: COSTS RELATIVE TO GDP ($billions) Year U.S. Tort Costs 1950 $ 1.8 U.S. GDP $ Tort Costs as % of GDP 294 0.62% 1960 5.4 526 1.03 1970 13.9 1,039 1.34 1980 42.7 2,790 1.53 1990 130.2 5,803 2.24 2000 179.1 9,817 1.82 2001 205.4 10,128 2.03 2002 232.9 10,470 2.22 2003 245.7 10,961 2.24 2004 260.3 11,686 2.23 2005 261.4 12,434 2.10 2006 247.0 13,195 1.87 TABLE 3: COSTS RELATIVE TO POPULATION Year U.S. Population (millions) U.S. Tort Costs ($billions) Tort Cost per Capita Inflation-Adjusted* Tort Cost per Capita 1950 152 $ 1.8 $ 12 $ 99 1960 181 5.4 30 205 1970 205 13.9 68 351 1980 228 42.7 187 459 1990 249 130.2 522 805 2000 281 179.1 636 745 2003 291 245.7 845 926 2004 294 260.3 887 946 2005 297 261.4 882 910 2006 299 247.0 825 825 *Restated in year 2006 dollars, based on consumer price index *Throughout this report, unadjusted, or nominal, GDP is used. Most news releases on GDP rely on inflation-adjusted, or real, GDP. © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 6 TABLE OF CONTENTS alleged against individuals, excluding medical malpractice. Personal tort costs arise predominantly from automobile accidents. As the table indicates, the increase in commercial tort costs since 1990 has exceeded the increase in personal tort costs. The difference is even greater when measured since 2000. However, commercial tort costs experienced a greater decline in 2006 than personal tort costs. The fairly modest growth in personal tort costs in recent years is due in some part to a reduction in auto accident frequency. Table 5 shows an index of accident frequency and claims per vehicle for property damage auto liability since 1991, based on industry trend data. The decrease in commercial tort costs is partly attributable to asbestos. Insured asbestos losses increased approximately $1.9 billion in 2006. This was lower than the comparable increases in 2003, 2004 and 2005 ($10.2 billion, $7.3 billion and $7.0 billion, respectively). Beyond asbestos, other commercial liability (excluding auto and medical malpractice) showed a significant drop in new claims being reported in 2006 versus 2005 and 2004. The recent decrease in commercial tort costs also coincides with significant reduction in insurance industry combined ratios. Five insurance industry lines of business that involve tort costs (commercial multi-peril, medical malpractice, products liability, other liability and commercial auto liability) all experienced lower direct combined ratios in 2006 than in each of the previous nine years. TABLE 4: PERSONAL VERSUS COMMERCIAL TORT COSTS TABLE 5: PROPERTY DAMAGE FREQUENCY INDEX ($billions) Year Personal Tort Costs Commercial Tort Costs 1990 $52.0 $ 78.2 1991 53.4 78.2 1992 56.4 83.8 1993 57.3 85.9 1994 60.1 87.8 1995 61.5 96.9 1996 62.7 91.9 1997 63.4 90.4 1998 66.3 98.9 1999 68.2 99.9 2000 72.3 106.8 2001 76.8 128.6 2002 80.0 152.9 2003 84.2 161.5 2004 86.8 173.5 2005 88.5 172.9 2006 87.4 159.6 (1991 = 1.000) 1991 1.000 1992 0.968 1993 0.984 1994 1.016 1995 1.013 1996 1.041 1997 1.021 1998 1.007 1999 1.016 2000 1.002 2001 1.001 2002 0.983 2003 0.960 2004 0.938 2005 0.923 2006 0.891 Average Annual Change Since 1990 3.3% 4.6% Since 2000 3.2% 6.9% © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 7 INTRODUCTION METHODOLOGY AND APPROACH COMPONENTS OF TORT COSTS The methodology used to develop estimates of tort costs in this study is similar to the methodology used in prior Tillinghast studies of U.S. tort costs. This study incorporates three cost components: Ⅲ benefits paid or expected to be paid to third parties (hereafter referred to as “losses”) Ⅲ defense costs Ⅲ administrative expenses. It is important to note that we have measured losses on an incurred basis, reflecting both payments as well as the collective change in reserves on incurred claims. We believe it is more appropriate to measure costs on an incurred basis than on a paid basis because of the greater time difference between an event and the payment of the claim than between the event and the estimate of the cost of that event. However, we recognize that more estimates of costs must be used when measuring on an incurred basis than when measuring on a paid basis. Our use of incurred losses instead of paid losses has resulted in higher increases in tort costs in recent years. Had paid losses been used, the costs of asbestos-related claims included in the study would have been lower. However, use of incurred losses does not overstate tort costs. To argue this, one would have to hypothesize that insurers knowingly set reserves too high. We do not believe this is the case. Defense costs reflect costs directly incurred in the defense and investigation of a claim, as well as general claim handling costs. The former is known as allocated loss adjustment expenses (ALAE), while the latter is often referred to as unallocated loss adjustment expenses (ULAE). Administrative expenses reflect expenses, other than defense costs, incurred by either the insurance company or self-insured entity in the administration of tort claims. We take no position on the efficiency of the insurance industry’s administrative expenses. However, we note the following: Ⅲ The relative share of total insured tort costs (as defined below) attributable to administrative expenses generally declined during the 1950s, 1960s and 1970s. However, the portion has not changed materially, either up or down, since 1980. Ⅲ The U.S. insurance industry is not a monopoly or a cartel. Insurers have an incentive to be as efficient as possible in order to either strengthen their competitive positions or maximize their profits. The industry is subject to the same cost and competitive pressures that face most industries. Ⅲ We believe administrative expenses are a real cost of the tort system. Their inclusion undoubtedly increases the absolute levels of estimated tort costs, but has a negligible impact on recent tort cost trends and actually lessens the long-term trends in tort cost growth. As detailed in Appendix 3, Table 6 shows the average administrative expense portion of insured tort costs by decade. TABLE 6: TORT COSTS — ADMINISTRATIVE EXPENSE PORTION Time Period Insured Tort Costs — Administrative Expense Portion 1950-1959 32.2% 1960-1969 29.0 1970-1979 26.0 1980-1989 22.0 1990-1999 23.0 2000-2006 23.0 © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 8 TABLE OF CONTENTS CATEGORIES OF TORT COSTS Tillinghast computed tort costs in the following three categories: Ⅲ insured costs (excluding medical malpractice) Ⅲ self-insured costs (excluding medical malpractice) Ⅲ medical malpractice costs. We derived insured costs from composite financial data for the U.S. insurance industry, as tabulated by A.M. Best. These data are considered highly reliable because they are subject to audit and are reviewed by state regulatory agencies. Moreover, while certain product lines have changed over time, the data are available as far back as 1950 and, in some cases, even earlier. The statutory lines of business that we include in the insured category are as follows: Ⅲ private passenger auto liability Ⅲ homeowners multi-peril Ⅲ farmowners multi-peril Ⅲ commercial auto liability Ⅲ commercial multi-peril Ⅲ other liability Ⅲ products liability. The following should be noted regarding the lines of business included: Ⅲ For both personal auto liability and commercial auto liability, costs associated with personal injury protection (“PIP,” also known as “no-fault”) are excluded. PIP costs are excluded since PIP is, in theory, a first party coverage, not a liability coverage. This exclusion has only a minor impact on commercial auto costs, but is material for personal auto liability. Ⅲ Homeowners and farmowners multiperil are largely first-party property coverages that have a liability (or tort) element. We excluded 91% of the costs for these lines. Our estimate that 9% of the costs for these lines are tort-related is based on our experience with these coverages. Ⅲ Commercial multi-peril (CMP) is also a coverage that includes both property and liability. However, since 1992, insurance data have been split to the liability and property components. For years prior to 1992, we include up to 50% of total CMP costs in this study. Ⅲ We do not include any costs in this study from workers compensation (in theory, a first-party coverage), aviation or ocean marine. The latter two coverages do have a liability component to them; however, we excluded them given their size and a lack of foundation for estimating the liability portion. The insured tort costs are the sum of the three components of losses, loss adjustment expenses and administrative expenses. The last component includes the following statutory expense categories: Ⅲ commissions and brokerage Ⅲ other acquisition expenses Ⅲ general expenses Ⅲ taxes, licenses and fees. Total tort costs from the A.M. Best data are reduced slightly to reflect an estimate of non-U.S. business in the data. The reduction varies by line of business and is approximately 2%. Earned premiums are displayed in Appendix 3. The actual premiums are not considered in the total tort costs shown in column (6). (The arithmetic in the appendix multiplies premiums by ratios in which earned premium is the denominator, effectively eliminating premiums from the resulting product.) As such, any increase in insurance premiums without a corresponding increase in costs has no impact on the estimated tort costs in this study. As shown in Appendix 3, total insured tort costs in 2006 are estimated to be $171.2 billion. The second category of tort costs is self-insured costs, excluding medical malpractice. Appendix 4 outlines the estimated costs for this category. © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 9 As shown in this appendix, we estimate 2% of personal tort costs to be in this category. This is not to say that 2% of the auto driving population is uninsured or that 2% of auto accidents involve an uninsured driver. (Actual figures for these items would likely be far higher than 2%.) Rather, the 2% provision reflects our estimate of the additional tort costs that are not included in the insured data. Many personal auto insurance policies include coverage for uninsured motorists, whereby the insured is compensated if injured in an auto accident caused by an uninsured or underinsured driver. As such, the “insured” tort costs described previously already include the costs associated with many auto accidents involving uninsured drivers. The 2% provision adds $1.7 billion to our estimate of 2006 personal tort costs. Our estimate of self-insured tort costs is approximately $43.8 billion for commercial risks in 2006. This estimate includes tort costs paid by various forms of self-insurance, such as large deductibles and captive insurance programs. The estimate also considers insurance purchased directly from non-U.S. insurance companies, since such insured costs are not captured in the A.M. Best data used to estimate the insured cost category. To our knowledge, no source of data exists that tabulates the losses incurred by all self-insured entities. However, various organizations have estimated the size of this market. We have relied on the various estimates available, as well as Tillinghast’s experience in this field, in developing the costs for this category. We have assumed that the administrative expense component in this category is 10% lower than the insured category. Our estimate of commercial self-insured costs does not capture certain extraordinary costs. For example, costs resulting from the 1998 settlement between tobacco manufacturers and various state attorneys general are not explicitly included in this study. As can be seen in Appendix 4, our estimates of commercial self-insured costs show a long-term increase in the portion of commercial tort costs that are self-insured. The third category of tort costs is medical malpractice, both insured and self-insured. Appendix 5 shows the estimated medical malpractice tort costs since 1975. A.M. Best data have segregated medical malpractice costs since 1975. However, the portion of medical malpractice costs that are insured has fluctuated significantly since then. Our estimate of medical malpractice costs is not based on A.M. Best data, but rather on Tillinghast’s internal estimates of state-by-state medical malpractice costs. The state costs per physician and per occupied hospital bed are multiplied by the number of practicing physicians and occupied beds by year to develop the estimated medical malpractice losses and LAE. Administrative expenses are included; as with the self-insured estimate, we assume a 10% lower cost than insurance data would indicate. As shown in Appendix 5, our estimate of medical malpractice costs in 2006 is approximately $30.3 billion. Our analysis suggests that, since 1975, medical malpractice costs have increased at an annual rate of 11.1%, versus 8.2% for all other tort costs. EXCLUDED COSTS Our definition of tort cost is largely governed by traditional liability insurance coverages. We previously noted the exclusion of tobacco settlements. For gray areas where awards and settlements are typically (but not always) excluded, such as punitive damages (which are included in the insurance contract in certain states) and certain types of contract and shareholder litigation, the costs reflected in this study © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 10 INTRODUCTION TABLE OF CONTENTS are consistent with those reported by the insurance companies themselves. Therefore, while certain of these costs may be included in the tort cost totals, we are unable to separately account for them. We have not included costs incurred by federal and state court systems in administering actual suits. We do not believe the omission of these costs significantly understates our cost index or in any material way distorts long-term trends. As noted previously, this study does not attempt to quantify the benefits of the tort system. Such benefits include a systematic resolution of disputes, thereby reducing conflict, possibly including violence. Another indirect benefit is that the tort system may act as a deterrent to unsafe practices and products. From this perspective, compensation for pain and suffering is seen as beneficial to society as a whole. Certain indirect costs are also omitted, such as those associated with litigation avoidance. These costs range from potentially unnecessary and duplicative medical tests ordered by doctors as a defense against possible malpractice allegations, to the disappearance of certain products or whole industries from the marketplace because of high product liability cost. © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 11 INTRODUCTION LOOKING AHEAD Tort cost growth was negative in 2006, a 5.5% decrease. This was the first decrease in costs since 1997. The lower growth rate is largely due to commercial lines, as shown in Table 7. For 2007, we do not expect either a continuation of the decrease in costs nor a significant increase in costs. Specifically, we expect total tort costs to increase approximately 2.5% in 2007, to $253.2 billion. We do not expect the drop in claim frequency to be as significant in 2007 as it was in 2006. Some personal auto data that we have observed suggests that the frequency declines that have persisted for a decade may be coming to an end. In addition, the drop in commercial liability claims in 2006 will be difficult to repeat in 2007 to the same degree. The Congressional Budget Office (CBO) anticipates an increase in GDP of 4.3% in 2007. Combining this level of GDP increase with our forecast on tort costs yields a ratio of tort costs to GDP of 1.84% in 2007. Looking ahead, we anticipate growth in U.S. tort costs to range from 3% to 6% in 2008, with a midpoint of 4.5%. We expect a similar increase in 2009. CBO forecasts call for GDP growth to be 4.8% in 2008, and 5.0% for 2009. These assumptions yield projected tort costs, GDP and tort-to-GDP ratios as shown in Table 8. TABLE 7: ONE-YEAR GROWTH IN TORT COST Year Personal Commercial Total 2001 6.2% 20.4% 14.7% 2002 4.2 18.9 13.4 2003 5.3 5.6 5.5 2004 3.1 7.5 6.0 2005 1.9 -0.4 0.4 2006 -1.3 -7.7 -5.5 TABLE 8: TORT COSTS RELATIVE TO GDP ($billions) Tort Costs as % of GDP Year U.S. Tort Costs U.S. GDP 2005 261.4 12,434 2.10 2006 247.0 13,195 1.87 2007 (est.) 253.2 13,763 1.84 2008 (est.) 264.6 14,428 1.83 2009 (est.) 276.5 15,150 1.83 The near future of U.S. tort cost growth will depend on several factors, including: Ⅲ Will personal auto liability continue to show a negative accident frequency? Ⅲ What litigation activity will result from the meltdown in the subprime mortgage market? Ⅲ Are companies facing material litigation related to global warming? Ⅲ Will issues surrounding the timing of options grants generate significant tort costs? Ⅲ Will medical malpractice loss trends continue to remain modest after significant growth earlier this decade? Ⅲ Are further reserve increases for asbestos likely? Ⅲ Will new attempts at expanding liability of third parties be successful? © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 12 APPENDICES Cost of the U.S. Tort System — 1950-2006 ......................................Appendix 1A Cost of the U.S. Tort System — 1950-2006 — Average Annual Changes by Groups of Years ..................................Appendix 1B Summary of All Tort System Costs ....................................................Appendix 2 Insured Tort Costs ............................................................................Appendix 3 Cost of the U.S. Tort System — Comparisons of Personal Lines to Commercial Lines Costs and Impact of Self-Insurance ..................Appendix 4 Medical Malpractice Tort Costs ..........................................................Appendix 5 © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 13 APPENDIX 1A COST OF THE U.S. TORT SYSTEM — 1950-2006 Year (1) 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Notes: U.S. Population (millions) CPI (all items) CPI (medical care) (2) (3) (4) 152 0.241 0.151 155 0.260 0.159 158 0.265 0.167 160 0.267 0.173 163 0.269 0.178 166 0.268 0.182 169 0.272 0.189 172 0.281 0.197 175 0.289 0.206 178 0.291 0.215 181 0.296 0.223 184 0.299 0.229 187 0.302 0.235 189 0.306 0.241 192 0.310 0.246 194 0.315 0.252 197 0.324 0.263 199 0.334 0.282 201 0.348 0.299 203 0.367 0.319 205 0.388 0.340 208 0.405 0.361 210 0.418 0.373 212 0.444 0.388 214 0.493 0.424 216 0.538 0.475 218 0.569 0.520 220 0.606 0.570 223 0.652 0.618 225 0.726 0.675 228 0.824 0.749 230 0.909 0.829 232 0.965 0.925 234 0.996 1.006 236 1.039 1.068 239 1.076 1.135 241 1.096 1.220 243 1.136 1.301 245 1.183 1.386 247 1.240 1.493 249 1.307 1.628 252 1.362 1.770 255 1.403 1.901 258 1.445 2.014 260 1.482 2.110 263 1.524 2.205 265 1.569 2.282 268 1.605 2.346 270 1.630 2.421 273 1.666 2.506 281 1.722 2.608 285 1.771 2.728 288 1.799 2.856 291 1.840 2.971 294 1.889 3.101 297 1.953 3.232 299 2.016 3.362 (2) From U.S. Census Bureau (3)-(4) From U.S. Department of Labor, Bureau of Labor Statistics Gross Domestic Product ($billions) Tort System Costs ($billions) (5) (6) $294 339 358 379 380 415 437 461 467 507 526 545 586 618 664 719 788 833 910 985 1,039 1,127 1,238 1,383 1,500 1,638 1,825 2,031 2,295 2,563 2,790 3,128 3,255 3,537 3,933 4,220 4,463 4,739 5,104 5,484 5,803 5,996 6,338 6,657 7,072 7,398 7,817 8,304 8,747 9,268 9,817 10,128 10,470 10,961 11,686 12,434 13,195 $1.8 2.3 2.7 3.0 3.1 3.4 3.9 4.5 4.9 5.2 5.4 5.7 6.0 6.6 7.3 7.9 8.7 9.6 10.6 12.0 13.9 15.0 15.7 15.2 16.5 20.0 23.4 28.0 32.7 37.0 42.7 49.2 56.7 64.4 66.9 83.7 101.7 110.5 114.0 126.2 130.2 131.6 140.2 143.2 147.8 158.4 154.5 153.8 165.2 168.1 179.1 205.4 232.9 245.7 260.3 261.4 247.0 Tort Costs as % of GDP (7) 0.62% 0.67 0.75 0.78 0.81 0.82 0.89 0.98 1.04 1.03 1.03 1.04 1.02 1.07 1.10 1.11 1.11 1.15 1.17 1.22 1.34 1.33 1.27 1.10 1.10 1.22 1.28 1.38 1.42 1.44 1.53 1.57 1.74 1.82 1.70 1.98 2.28 2.33 2.23 2.30 2.24 2.20 2.21 2.15 2.09 2.14 1.98 1.85 1.89 1.81 1.82 2.03 2.22 2.24 2.23 2.10 1.87 (5) From U.S. Department of Commerce, Bureau of Economic Analysis (6) From Appendix 2, column (5) © 2007 Towers Perrin (7) = (6) / (5) 2007 Update on U.S. Tort Cost Trends | 14 APPENDIX 1B COST OF THE U.S. TORT SYSTEM — 1950-2006 Average Annual Changes by Groups of Years Year U.S. Population (millions) CPI (all items) CPI (medical care) Gross Domestic Product ($billions) Tort System Costs ($billions) Tort Costs as % of GDP (1) (2) (3) (4) (5) (6) (7) 1951-2006 1.2% 3.9% 5.7% 7.0% 9.2% 2.0% 1951-1960 1961-1970 1971-1980 1981-1990 1991-2000 2001 2002 2003 2004 2005 2006 1.7 1.3 1.1 0.9 1.2 1.2 1.2 0.9 1.0 1.0 1.0 2.1 2.7 7.8 4.7 2.8 2.8 1.6 2.3 2.7 3.4 3.2 4.0 4.3 8.2 8.1 4.8 4.6 4.7 4.0 4.4 4.2 4.0 6.0 7.0 10.4 7.6 5.4 3.2 3.4 4.7 6.6 6.4 6.1 11.6 9.8 11.9 11.8 3.2 14.7 13.4 5.5 6.0 0.4 -5.5 5.3 2.6 1.4 3.9 –2.0 11.2 9.7 0.8 –0.6 -5.6 -11.0 1951-2000 2001-2006 1.2 1.0 4.0 2.7 5.9 4.3 7.3 5.1 9.6 5.5 2.2 0.4 Note: Based on figures in Appendix 1A © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 15 APPENDIX 2 SUMMARY OF ALL TORT SYSTEM COSTS Liability Insured Cost (2) Year (1) 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Notes: $ 1,723,059 2,177,633 2,557,353 2,828,158 2,950,051 3,250,829 3,719,824 4,293,067 4,624,008 4,971,526 5,186,101 5,394,567 5,704,594 6,299,547 6,924,227 7,570,265 8,322,529 9,150,869 10,102,273 11,413,351 13,208,732 14,304,768 14,933,112 14,621,296 15,837,813 17,914,909 20,687,521 24,073,405 27,616,588 30,934,883 34,057,943 38,929,780 44,438,093 49,946,629 51,208,738 64,455,656 78,167,587 85,112,183 88,462,814 97,030,370 100,602,676 101,016,143 106,652,899 108,560,517 112,042,831 118,478,058 115,362,594 113,561,713 121,428,366 122,863,786 129,528,854 146,177,700 165,841,657 173,873,885 181,954,952 181,971,396 171,228,466 Medical Malpractice (3) $ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 1,158,476 1,420,786 1,811,894 2,241,760 2,745,213 3,376,381 4,065,717 4,845,214 5,802,016 6,768,896 6,740,227 6,892,127 7,314,182 7,622,786 8,498,791 9,202,873 10,077,004 10,599,730 11,511,556 12,484,159 13,285,645 14,106,400 15,474,060 16,429,936 17,898,229 19,596,842 21,723,960 24,152,742 26,484,564 28,189,883 29,391,286 30,251,502 Last three 0s omitted (2) From Appendix 3 [1975-2006 excludes medical malpractice] Self- (Un) Insured (4) $ 86,153 108,882 127,868 141,408 147,503 162,541 185,991 214,653 231,200 248,576 259,305 269,728 285,230 314,977 346,211 378,513 416,126 457,543 505,114 570,668 660,437 715,238 746,656 563,240 623,535 960,444 1,245,574 2,081,899 2,814,504 3,358,083 5,235,693 6,245,906 7,432,699 8,676,935 8,966,786 12,484,152 16,627,514 18,087,846 17,925,304 20,639,237 20,357,363 20,522,153 22,915,896 23,127,472 23,307,639 26,602,720 25,068,233 24,767,144 27,374,427 27,339,281 29,955,242 37,453,893 42,924,460 45,333,244 50,197,025 50,057,650 45,529,106 Total Cost (5) $ 1,809,212 2,286,515 2,685,221 2,969,566 3,097,553 3,413,370 3,905,815 4,507,720 4,855,208 5,220,102 5,445,407 5,664,295 5,989,824 6,614,525 7,270,438 7,948,778 8,738,655 9,608,413 10,607,387 11,984,019 13,869,169 15,020,007 15,679,768 15,184,535 16,461,347 20,033,829 23,353,881 27,967,198 32,672,853 37,038,178 42,670,017 49,241,403 56,716,006 64,425,580 66,944,420 83,680,035 101,687,229 110,514,210 114,010,903 126,168,398 130,162,912 131,615,300 140,168,525 143,199,545 147,834,629 158,366,422 154,537,227 153,802,916 165,232,729 168,101,297 179,080,939 205,355,553 232,918,858 245,691,693 260,341,861 261,420,332 247,009,075 (3) From Appendix 5 (4) From Appendix 4 [Prior to 1973, .05 x (2)] © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 16 APPENDIX 3 INSURED TORT COSTS Year Earned Premium Loss & LAE Ratio Expense Ratio Combined Ratio Insured Tort Costs (1) (2) (3) (4) (5) (6) 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 $ 1,752,857 2,083,720 2,515,153 2,981,588 3,155,435 3,337,773 3,619,255 4,035,199 4,442,849 4,951,128 5,276,984 5,504,507 5,819,378 6,224,657 6,688,473 7,379,531 8,187,339 8,947,529 9,768,188 10,957,402 12,715,930 14,273,904 15,144,973 14,360,195 14,908,953 16,500,824 20,090,047 24,973,118 28,692,720 31,088,697 32,194,946 32,838,195 34,170,095 36,235,619 39,843,449 50,372,373 68,516,069 78,337,490 81,771,490 83,745,030 87,971,533 89,311,786 92,659,338 96,562,526 101,730,356 105,299,103 108,378,052 110,525,049 113,325,370 111,429,324 113,589,472 124,411,884 140,996,964 161,077,976 173,673,135 179,195,243 181,766,485 Notes: (2), (6) Last three 0s omitted 64.3% 71.1 69.3 63.2 61.4 64.9 70.1 74.0 72.6 69.9 67.7 67.1 67.3 70.5 73.4 73.5 73.4 74.1 75.6 76.9 77.5 74.1 71.8 74.8 78.5 81.5 77.3 71.4 70.5 73.1 78.7 90.7 101.5 109.2 101.1 102.9 90.7 84.8 83.7 89.7 89.1 87.0 89.9 87.6 85.7 87.6 81.7 77.4 81.2 83.7 87.4 92.5 93.2 83.9 80.2 77.3 69.3 All data reflect direct revenues and costs from Best’s Aggregates and Averages 34.0% 33.4 32.4 31.6 32.1 32.5 32.7 32.4 31.4 30.6 30.6 30.9 30.8 30.7 30.1 29.1 28.3 28.1 27.8 27.2 26.4 26.1 26.8 27.0 27.7 27.0 25.7 25.0 25.8 26.4 27.1 27.8 28.6 28.6 27.4 25.1 23.3 23.9 24.5 26.1 25.2 26.1 25.2 24.8 24.4 24.9 24.8 25.4 25.9 26.5 26.6 25.0 24.5 24.1 24.6 24.3 24.9 Prior to 1975, medical malpractice is included; for 1975-2006, it is excluded. (6) = (2) x (5) 98.3% 104.5 101.7 94.9 93.5 97.4 102.8 106.4 104.1 100.4 98.3 98.0 98.0 101.2 103.5 102.6 101.7 102.3 103.4 104.2 103.9 100.2 98.6 101.8 106.2 108.6 103.0 96.4 96.2 99.5 105.8 118.6 130.0 137.8 128.5 128.0 114.1 108.6 108.2 115.9 114.4 113.1 115.1 112.4 110.1 112.5 106.4 102.7 107.2 110.3 114.0 117.5 117.6 107.9 104.8 101.5 94.2 $ 1,723,059 2,177,633 2,557,353 2,828,158 2,950,051 3,250,829 3,719,824 4,293,067 4,624,008 4,971,526 5,186,101 5,394,567 5,704,594 6,299,547 6,924,227 7,570,265 8,322,529 9,150,869 10,102,273 11,413,351 13,208,732 14,304,768 14,933,112 14,621,296 15,837,813 17,914,909 20,687,521 24,073,405 27,616,588 30,934,883 34,057,943 38,929,780 44,438,093 49,946,629 51,208,738 64,455,656 78,167,587 85,112,183 88,462,814 97,030,370 100,602,676 101,016,143 106,652,899 108,560,517 112,042,831 118,478,058 115,362,594 113,561,713 121,428,366 122,863,786 129,528,854 146,177,700 165,841,657 173,873,885 181,954,952 181,971,396 171,228,466 © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 17 APPENDIX 4 COST OF THE U.S. TORT SYSTEM Comparisons of Personal Lines to Commercial Lines Costs and Impact of Self-Insurance P ersonal Lines Year Insured Self- (Un) Insured (1) (2) (3) 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 $ 8,521,899 8,921,581 10,336,734 11,609,756 12,902,054 14,381,293 15,985,767 17,084,039 18,892,570 20,828,903 22,945,067 25,615,607 29,695,287 34,460,827 38,092,590 41,783,652 46,424,500 50,967,722 52,338,179 55,274,662 56,164,851 58,857,222 60,222,560 61,414,886 62,097,411 64,995,727 66,807,453 70,866,341 75,245,057 78,405,888 82,522,939 85,077,876 86,731,770 85,645,991 Notes: 2.0% 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Total (4) $ 8,695,815 9,103,654 10,547,688 11,846,690 13,165,362 14,674,789 16,312,007 17,432,692 19,278,133 21,253,983 23,413,333 26,138,375 30,301,313 35,164,110 38,869,990 42,636,380 47,371,939 52,007,879 53,406,306 56,402,716 57,311,072 60,058,389 61,451,592 62,668,251 63,364,705 66,322,170 68,170,870 72,312,592 76,780,671 80,006,008 84,207,081 86,814,159 88,501,806 87,393,869 Insured Commercial Lines Self- (Un) Insured Total Self- (Un) Insured (5) (6) (7) (8) $ 6,099,397 6,916,232 7,578,176 9,077,764 11,171,351 13,235,295 14,949,116 16,973,905 20,037,210 23,609,190 27,001,563 25,593,130 34,760,369 43,706,759 47,019,592 46,679,161 50,605,870 49,634,954 48,677,963 51,378,237 52,395,666 53,185,609 58,255,497 53,947,707 51,464,302 56,432,639 56,056,333 58,662,514 70,932,643 87,435,769 91,350,946 96,877,076 95,239,627 85,582,475 6.0% 6.0 9.0 10.0 14.0 16.0 16.9 22.4 22.6 22.9 23.3 24.8 25.5 26.7 26.9 26.8 28.0 28.0 28.6 29.8 29.6 29.4 30.3 30.6 31.3 31.6 31.7 32.7 33.6 32.1 32.3 33.3 33.6 33.8 $ 6,488,720 7,357,694 8,327,665 10,086,405 12,989,943 15,756,304 17,980,958 21,860,944 25,897,553 30,616,810 35,210,231 34,037,149 46,638,495 59,630,991 64,330,038 63,751,737 70,297,668 68,952,159 68,131,990 73,166,079 74,376,917 75,292,080 83,629,186 77,762,576 74,964,151 82,480,623 82,032,197 87,171,504 106,850,923 128,760,109 135,000,048 145,337,818 143,527,240 129,363,704 $ 563,240 623,535 960,444 1,245,574 2,081,899 2,814,504 3,358,083 5,235,693 6,245,906 7,432,699 8,676,935 8,966,786 12,484,152 16,627,514 18,087,846 17,925,304 20,639,237 20,357,363 20,522,153 22,915,896 23,127,472 23,307,639 26,602,720 25,068,233 24,767,144 27,374,427 27,339,281 29,955,242 37,453,893 42,924,460 45,333,244 50,197,025 50,057,650 45,529,106 Last three 0s omitted (2), (5) From Best’s Aggregates and Averages (excludes medical malpractice) (3) Based on internal Tillinghast interviews (4) = (2) / [1.0 – (3)] (6) Based on various studies estimating the size of the self-insured market and estimates by Tillinghast (7) = (5) / [1.0 – (6)] (8) = [(4) – (2)] + [(7) – (5)] © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 18 APPENDIX 5 MEDICAL MALPRACTICE TORT COSTS Year Hospital (1) (2) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Notes: $ 378,619 465,814 567,845 690,917 848,193 1,051,838 1,290,927 1,576,183 1,890,801 2,181,499 2,129,009 2,175,976 2,268,904 2,363,708 2,456,483 2,572,981 2,692,628 2,841,396 2,967,300 3,049,164 3,162,980 3,284,839 3,481,942 3,658,590 3,997,582 4,393,333 4,904,910 5,559,553 5,963,951 6,164,095 6,245,734 6,470,009 Loss and LAE Costs Physicians Other (3) $ 554,171 680,949 875,367 1,084,047 1,363,543 1,690,090 1,998,159 2,350,909 2,772,834 3,272,719 3,418,252 3,433,666 3,581,822 3,757,656 4,013,665 4,468,082 4,966,450 5,481,304 5,863,791 6,322,753 6,796,529 7,364,371 7,917,420 8,656,884 9,528,191 10,579,339 12,093,338 13,437,948 14,787,711 15,637,546 16,519,377 16,858,642 (4) $ 83,951 107,337 140,488 179,693 232,868 300,238 374,557 465,101 574,426 698,675 710,593 718,584 749,467 784,135 828,813 901,947 981,113 1,066,122 1,131,246 1,200,524 1,288,552 1,391,562 1,504,483 1,641,645 1,821,007 2,035,964 2,334,513 2,635,178 2,878,501 3,024,146 3,157,791 3,235,960 $ Total U/W Expense Ratio (5) (6) (7) 12.2 11.7 12.6 12.8 11.0 9.9 9.9 9.3 9.7 9.1 7.2 8.2 9.8 9.4 14.1 13.7 14.3 11.4 13.5 15.3 15.3 14.6 16.6 15.1 14.3 13.2 11.0 10.4 10.8 11.9 11.8 12.2 $ 1,158,476 1,420,786 1,811,894 2,241,760 2,745,213 3,376,381 4,065,717 4,845,214 5,802,016 6,768,896 6,740,227 6,892,127 7,314,182 7,622,786 8,498,791 9,202,873 10,077,004 10,599,730 11,511,556 12,484,159 13,285,645 14,106,400 15,474,060 16,429,936 17,898,229 19,596,842 21,723,960 24,152,742 26,484,564 28,189,883 29,391,286 30,251,502 1,016,742 1,254,100 1,583,700 1,954,658 2,444,605 3,042,166 3,663,643 4,392,193 5,238,060 6,152,893 6,257,854 6,328,226 6,600,193 6,905,499 7,298,961 7,943,010 8,640,192 9,388,822 9,962,337 10,572,441 11,248,061 12,040,772 12,903,845 13,957,119 15,346,779 17,008,636 19,332,761 21,632,680 23,630,163 24,825,787 25,922,902 26,564,611 Total Cost Last three 0s omitted (2), (3), (4) From internal Tillinghast study (5) = (2) + (3) + (4) (6) From Best’s Aggregates and Averages; the ratio of underwriting expenses to all losses and expenses combined, multiplied by 0.90 to reflect lower costs in alternative market. Adjusted downward for 2005 and 2006 due to jump in industry ratio (7) = (5) / [1.0 – (6)] © 2007 Towers Perrin 2007 Update on U.S. Tort Cost Trends | 19 ABOUT TOWERS PERRIN Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, design and management. It also provides solutions in the areas of risk and capital management, reinsurance intermediary services and actuarial consulting. The Tillinghast practice of Towers Perrin provides consulting to the insurance industry. Towers Perrin has offices and business partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at www.towersperrin.com. © 2007 Towers Perrin www.towersperrin.com